Senate Student-Loan Plan Falls Apart Over Cost, Aides Say

By James Rowley -
Jul 11, 2013

A tentative deal among senators to
move student-loan interest rates to a market-based variable rate
instead of fixed percentages fell apart after the plan was
estimated to cost $22 billion over 10 years, Senate aides said.

The Congressional Budget Office’s cost estimate forced
members of the bipartisan group to redraft their plan to tie the
rates for Stafford and PLUS loans to changes in the yield on 10-year Treasury notes, said Republican and Democratic aides who
spoke on condition of anonymity to discuss the talks.

The delay means that Congress won’t be able to act until
next week at the earliest to roll back the July 1 doubling of
interest rates -- from 3.4 percent to 6.8 percent -- on new
subsidized Stafford loans, which are available to undergraduates
based on financial need. Lawmakers were unable to agree on a
solution to avert the increase before leaving on their week-long
break for the July 4 holiday. The interest rate on unsubsidized
Stafford loans, which are available to any undergraduate
student, was already at 6.8 percent.

Earlier in the day, the lead Republican negotiator, Senator
Lamar Alexander of Tennessee, said: “We have only one number to
get back. I think we have an agreement in principle.”

The agreement was dependent on the CBO estimate, which
determined how the plan would affect the budget deficit. New
variables will be submitted to the CBO for another cost
analysis, aides said.

Rate Caps

A big factor in the expense, the aides said, was the cap
that negotiators placed on the variable rates. The cap on
Stafford loans was set at 8.25 percent; for PLUS loans, which go
to graduate students and parents of undergraduates, it was set
at 9.25 percent.

Alexander and other lawmakers have warned that interest-rate caps are expensive. Republicans want to minimize the
expense to taxpayers, while Democrats have sought to reduce the
profit that the Treasury makes off students financing their
education through the loan program.

Senators redoubled their attempt to find a solution after
Republicans yesterday blocked a Democratic effort to bring up
legislation, S. 1238, that would bring back, for a year, the 3.4
percent rate for subsidized Stafford loans disbursed after July
1. Students take out new loans for each academic year.

That followed the Senate Democrats’ failure last month to
advance another bill, S. 953, that would have extended the lower
subsidized Stafford loan rate for two years. Republicans blocked
that measure, arguing that Congress should adopt a long-term
solution and peg student-loan interest rates to the 10-year
Treasury note’s yield.

Concession to Democrats

Inclusion of a cap on annual interest-rate increases was a
concession to Democrats, who have balked at tying the loans to
market fluctuations.

That concept was proposed by President Barack Obama and
embodied in House-passed legislation that would peg loan rates
to changes in the 10-year Treasury note’s yield. That bill, H.R.
1911, would charge students 2.5 percentage points more than the
yield of the last 10-year Treasury note auction before June 1
and would cap rates at 8.5 percent.

Under the tentative Senate deal that fell apart today, the
interest rate for all Stafford undergraduate loans, subsidized
and unsubsidized, would be set annually at 1.8 percentage points
above the yield of the last 10-year Treasury-note auction before
June 1. This year, the yield of that auction was 1.81 percent;
if the plan’s provisions were effective now, 11 million students
taking out undergraduate Stafford loans this year would be
charged an interest rate of 3.61 percent, the aides said.

Larger Markup

The markup for PLUS loans would be larger, the aides said.
Those borrowers would be charged 4.5 percentage points more than
that Treasury-note yield, the aides said. They currently pay 7.9
percent interest; according to the aides, they would pay 6.31
percent under the Senate compromise.

Burr told reporters yesterday that the Obama administration
is pressuring Congress behind the scenes to end the impasse
because “the White House would like to have this behind them.”

The Obama administration has urged that any plan passed by
Congress apply to loans disbursed after June 30, according to a
July 3 Education Department memo.

If the law is changed, the agency and its servicers will
adjust rates for all affected borrowers, including those who
already received their first subsidized loan disbursement,
according to the Education Department.